DOLLAR PULLS BACK FROM 200-DAY AVERAGE AS COMMODITIES BOUNCE OFF CHART SUPPORT -- SURGING LUMBER PRICES MAY CARRY GOOD NEWS FOR HOMEBUILDERS AS DR HORTON LEADS A STRONG HOUSING RALLY -- MARKET REBOUNDS AGAIN ON LIGHT VOLUME

DOLLAR PULLBACK BOOSTS COMMODITIES... Chart 1 shows the DB Bullish Dollar Fund (UUP) meeting some resistance near it 200-day moving average. That's giving a nice boost to commodity markets which is coming at a good time since several commodities are testing support levels. Chart 2, for example, shows the Gold Trust Shares (GLD) bouncing off chart support along its late December low. Oil is having an even better day. Chart 3 shows the United States Oil Fund (USG) surging 2%. What especially noteworthy on Chart 3 is that the USO is bouncing from the bottom of a four-month trading range and its 200-day moving average. Chart 4 shows the DB Commodities Tracking Index Fund (DBC) also bouncing off its 200-day moving average.

Chart 1

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LUMBER PRICES SURGE ... Speaking of bouncing commodities, here's one that we don't look at often enough. And its price is climbing sharply. In fact, Chart 5 shows the price of lumber trading at the highest level since mid-2008 and having broken a nearly four-year down trendline. While that's a strong sign for lumber traders, it may also carry a bullish message for a group of stocks that relies heavily on the use of lumber. And that would be homebuilders which are also experiencing a nice rally.

Chart 5

DR HORTON LEADS HOMEBUILDING RALLY... DR Horton, the country's second largest homebuilder, report the first quarterly profit since 2007. Pending home sales also rose 1%. That good numbers propelled the DJ Home Construction ETF (ITB) to a 5% gain today. Chart 6 shows the ITB on the verge of reaching a new five month high. Its relative strength ratio (below chart) is moving up again. Although all 12 homebuilders rose today, the standout performer was DHI which surged 11%. Chart 7 shows that price rise occurring on very strong volume -- a bullish combination. I've written previous articles about the improving technical condition of the homebuilding group. Rising lumber prices are another positive sign for the group and the housing industry.

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HOUSING SHOWS MORE STABILITY ... I've probably shown this chart before but I think it bears repeating. Its a relative strength ratio of the DJ Home Construction ETF (ITB) divided by the S&P 500. The housing/SPX ratio peaked in 2005 which gave early warning of the end of the housing boom. Weakness in housing eventually took a heavy toll on global stocks and economies. The good news is that the ratio has been flattening out over the last year. In fact, the ITB has gained 52% over the last twelve months versus 33% for the S&P 500. Since I happen to believe that the direction of homebuilding stocks is a leading indicator of the housing industry, Chart 8 carries good news for both.

Chart 8

STOCKS BOUNCE ON WEAK VOLUME... Stocks rallied for the second day in a row. Unfortunately, volume declined for the second day in a row as well. During a normal pullback, volume should decline on down days and increase on up days. During the 2010 downturn, volume has done just the opposite -- increasing on down days and decreasing on up days. In addition, all three stock indexes shown below remain below their 50-day moving averages. The market is certainly entitled to a bounce after its January losses. So far, however, the bounce hasn't been technically impressive. I still lean toward the view that the market is in the midst of an intermediate correction which could eventually take it down toward its early November lows (a drop of 10% in the SPY). That would also bring the major market indexes closer to their 200-day moving averages which haven't been touched in seven months. An intermediate downturn (or even a period of consolidation lasting a few months) could correct that. The best we may be able to expect for the next few months is a churning market with little major trend direction. In that choppier environment, shorter-term trading and sector rotation strategies will become even more important.

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